The opinion of the court was delivered by: Lewis A. Kaplan, District Judge.
Liquidators of two hedge funds -- Bristol Fund, Ltd. ("Bristol") and Beacon Hill Master, Ltd (the "Master Fund") -- sue Banc of America Securities, LLC ("BAS") on behalf of the funds for aiding and abetting a fraudulent scheme allegedly committed by the funds' investment manager, Beacon Hill Asset Management, LLC, and its principals (collectively, "Beacon Hill"). They seek to recover (1) management fees paid to Beacon Hill and (2) the lost enterprise value of Bristol and the Master Fund as measured by the decline in value of the funds' portfolios as a result of the alleged fraud.*fn1 BAS moves to dismiss the allegations against it.
The gist of the amended complaint is that Beacon Hill reported fraudulently inflated net asset values ("NAVs") for Bristol, the Master Fund, and other hedge funds it managed, concealing that the funds actually were suffering substantial losses that ultimately led to their collapse in the fall of 2002. BAS allegedly assisted this scheme by providing false values for individual securities in the funds' portfolios to auditors at Beacon Hill's request.
The allegations are substantially the same as those made by the funds' investors in the related case Fraternity Fund v. Beacon Hill Asset Management.*fn2 Those allegations are described in detail in the Court's March 27, 2007 opinion in that case ("Fraternity Fund II"),*fn3 familiarity with which is assumed. The additional allegations relevant to this motion are as follows.
According to the amended complaint, Bristol is a Cayman-based hedge fund with directors in the Cayman Islands. Beacon Hill served as Bristol's investment manager.*fn4 It was paid a monthly advisory fee at an annual rate of one percent of the fund's NAV as well as an annual incentive fee equaling 20 percent of net profits, as measured by any increase in the fund's NAV over the value reported the previous year.*fn5
In early 2002, Bristol, along with two other Beacon Hill-managed hedge funds -- Safe Harbor Fund, LP ("Safe Harbor"), and Milestone Plus Partners, LP -- became "feeders" into the Master Fund, which was incorporated in the Cayman Islands and had "a board consisting of independent directors with no . . . ties to Beacon Hill." Each fund transferred its assets to the Master Fund and "participated pro rata in the Master Fund's trading profits and losses." The investments of the feeder funds were managed collectively according to a single investment strategy.*fn6
Pursuant to an investment management agreement executed shortly before the launch of the Master Fund (the "IMA"), Beacon Hill acted as the Master Fund's investment manager. Under the agreement, each feeder fund was to pay Beacon Hill its pro rata share of .0833 percent of the Master Fund's NAV each month. Bristol would pay an additional annual fee of 20 percent of any net appreciation of its NAV during the fiscal year.*fn7
According to plaintiffs, the IMA gave Beacon Hill "nearly complete discretion in effecting transactions to achieve the Master Fund's" investment objectives.*fn8 Indeed, Section 3 of the IMA provided that Beacon Hill would have broad authority to make investment decisions and manage the fund's assets.*fn9 Section 15 of the IMA provided further that Beacon Hill regularly would report the Master Fund's NAV. For purposes of determining NAV, securities in the fund's portfolio that were traded on exchanges or over the counter would be valued by looking at market quotations, but "[s]ecurities or other assets for which market quotations [were] not readily available [would] be valued at their fair value as determined in good faith in accordance with procedures adopted by the Investment Manager."*fn10 Plaintiffs allege that the feeder funds' portfolios consisted in large part of collateralized mortgage obligations ("CMOs").*fn11 As this Court noted in Fraternity Fund II, CMOs generally are not traded on exchanges, and their valuation requires a good deal of judgment.*fn12
Plaintiffs allege that the independent directors of Bristol and the Master Fund were deceived as to the actual value of the funds' assets as a result of Beacon Hill's fraudulent misrepresentations of NAVs. Had they known that the funds' NAVs were substantially lower than what Beacon Hill reported, they would have fired Beacon Hill as investment manager, thereby avoiding payment of management fees and substantial losses in the fall of 2002 when the funds collapsed.*fn13
Plaintiffs sued Beacon Hill, among others, on behalf of the Master Fund in New York Supreme Court*fn14 for, inter alia, fraud and breach of fiduciary duty, as well as breach of the IMA for failure to adhere to the valuation procedures laid out in Section 15. They here sue BAS for ...